2000 bug could slow bank deals Mergers 'risky' between those mired in software problem

'Highest priority'

More than a race to complete work before millennium

Financial services

December 15, 1997|By BLOOMBERG NEWS

NEW YORK -- The record pace of bank and brokerage takeovers that's swept the financial industry could slow next year because of a pesky software bug that prevents computers from understanding dates beyond 1999.

The so-called year 2000 problem may not sound like the kind of event that can halt security firms' rush to expand assets and sell products to more customers, but regulators are serious about making the repair of broken computers a top priority.

"The year 2000 issue will become more important in any discussions we may have with potential sellers as we get closer to 2000," said Larry Haeg, a spokesman for Norwest Corp., which has bought 34 banks since 1995 and is still in the market. "In those discussions, we will have to decide if there is enough lead time to convert them fully to Norwest's systems before the year 2000, especially for sellers behind schedule on compliance."

The Basle Committee on Banking Supervision, a board of senior supervisors from 10 countries, warned in September that any merger between banks struggling to fix the bug would be "highly risky."

Arthur Levitt, chairman of the Securities and Exchange Commission, told Wall Street last month to make year 2000 projects their "highest priority." In other words, mergers should take a back seat.

It's more than just a race to complete work before the millennium. The financial industry must put the final touches on their systems fixes, assuring seamless performance through the century, by Dec. 31, 1998. Regulators are leaving a year to test the links between banks, while threatening sanctions against laggard institutions.

Federal Reserve officials have pledged to visit every bank to check on year 2000 progress by the middle of next year. Spot inspections already have resulted in a "cease and desist" order last month against Putnam-Greene Financial Corp., a small Georgia holding company.

William Ryback, associate director of banking supervision, even threatened to shut down electronic links with foreign countries whose banks aren't prepared starting in 1999.

Industry associations are asking to push back other initiatives requiring computer overhauls, including the Nasdaq stock market's switch to decimal-pricing, so as not to distract programmers from working on year 2000 bugs.

Frank Zarb, chairman of the National Association of Securities Dealers, said Nov. 3 that trying to implement decimal-pricing in the next two years could lead to "disaster."

U.S. exchanges currently trade stocks in fractions of a dollar.

The computer flaw -- in which software programs assume the first two digits in any year are always "19" -- can be found throughout financial companies' computer systems.

Top banks such as Chase Manhattan and BankAmerica Corp. plan to spend more than $200 million on the problem.

Norwest, which has bought more banks in three years than any other, according to SNL Securities in Richmond, Va., is faring better than most. Its year 2000 costs should top out at $50 million, Haeg said.

Banks announced $72 billion in mergers this year alone, by SNL's count. Many banks don't expect to change their ways because of some computer bugs.

The looming deadline could accelerate merger activity, at least for a couple months. A bank that is far behind in upgrading its systems might try to sell before costs skyrocket, profits shrink and its allure to buyers dims.

Technology was a primary driver behind First Union Corp.'s purchase of CoreStates Financial Corp. last month, the biggest U.S. bank takeover ever.

CoreStates faced up to $60 million in year 2000 costs, and cited "First Union's technological leadership" as one of five reasons it decided to sell, in an analyst conference call.

Transactions like First Union's may be unusual, though.

For one, the Charlotte, N.C.-based bank's computers are in better shape than most, said William Ulrich, who helped reorganize First Union's banking system in the 1980s, as head of software development strategy for KPMG Peat Marwick.

KPMG's programmers threw out old code and slimmed down operations, eliminating duplicate programs.

Those few banks that are well prepared for the century date change will have a limited window to pursue buyouts, according to the Basle Committee.

As 2000 approaches, "There is a decreasing ability for any organization to absorb a noncompliant one and make the necessary changes," the Basle report said.

Consultants' caution is shared by some bank executives. First Union's Edward Crutchfield said the bank will halt its buying spree -- more than 80 banks in 12 years -- next year to integrate Signet Banking Corp. and CoreStates.

Hugh McColl, chief executive at NationsBank Corp., which has made nine bank takeovers worth $28 billion since 1995, also said after buying Barnett Banks Inc. in August that he will focus on digesting acquisitions.

Banks interested in buying securities firms won't find their two vTC systems meld any easier. Donaldson, Lufkin & Jenrette Inc., the nation's eighth largest brokerage, plans to spend up to $90 million to fix its 2000 flaws next year, or 24 percent of the firm's net income in the past 12 months.

That's on top of $27 million spent so far, according to a report filed with the SEC.

Pub Date: 12/15/97

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